Economists expect fresh rate hike

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By Melissa Luz T. Lopez
Senior Reporter

THE BANGKO SENTRAL ng Pilipinas (BSP) will most likely raise benchmark interest rates anew this week as inflation can be expected to have spiked further in July, analysts said in a BusinessWorld poll, with some noting there is room for a 50-basis-point (bp) hike to ease price pressures.

A poll of 14 economists last week yielded a median estimate of 5.5%, which if realized will inch up from June’s actual 5.2% and soar from July 2017’s 2.4%.

The estimate also falls in the middle of the 5.1-5.8% range given by the BSP Department of Economic Research last week.

Analysts’ July inflation rate estimates, monetary policy action expectations (2018)

“The main product groups that likely posted sharp price increases are fish, rice, corn, fruits, vegetables, tobacco, transport, electricity, gas and fuel,” said Security Bank Corp. economist Angelo B. Taningco, who gave a 5.7% estimate.

Typhoons and monsoon rains that hit the country last month contributed to price pressures, as did the P1 provisional increase in jeepney fares that took effect in early July, the analysts said.

The Philippine Statistics Authority will report official inflation data on Tuesday. As of end-June, prices have increased by an average of 4.3%, well beyond the BSP’s 2-4% goal for 2018.

Preliminary data from the Finance department showed that July inflation could settle at 5.3%, still higher than June’s tally which was a nine-year high.

Economists saw a broad-based increase in commodity prices, led largely by movements in food and fuel costs. The peso, which traded weaker than P53 versus the dollar last month, may have also jacked up the cost of imported goods.

“It is likely that the peak of inflation is still ahead of us,” said Jose Mario I. Cuyegkeng, senior economist at ING Bank N.V. Manila, adding: “We expect government efforts to make a more significant impact on alleviating supply and distribution weaknesses.”

Analysts said that inflation could top out in August and slowly slide back to the target range by 2019.

Emmanuel J. Lopez, economics professor and dean of the Colegio de San Juan de Letran Graduate School, also noted that price increases could “gradually taper off” this month amid a slowdown in business activity because of the Chinese “ghost month” superstition.

The BSP has said that inflation will likely peak this quarter and eventually ease, bringing the full-year average to 4.5%.

The economists agree that the BSP will raise policy rates this week, but differ on magnitude.

Six analysts said a 50 bp hike would be announced by the Monetary Board on Thursday, while the rest see a 25 bp increase on the table.

“In our meeting with the BSP Governor last week, he stressed the ‘strong response’ of the BSP to the persistently elevating inflation level. An equivalent of strong response would be, to me, a 50 basis points hike,” said Ruben Carlo O. Asuncion, chief economist at Union Bank of the Philippines.

BSP Governor Nestor A. Espenilla, Jr. has hinted of a “strong follow-through” policy action after rate hikes of 25bp each in May and June, in a bid to rein in inflation pressures.

Others have interpreted the change in wording as an allusion to the magnitude of the rate hike, compared to a “measured” response previously committed by the central bank chief.

Market observers have flagged the need for a more “aggressive” response from the central bank in the face of unrelenting inflation.

Alice Fulwood, associate economist at UBS, noted that upcoming trade data and second-quarter gross domestic product growth figures also due this week could also affect the BSP’s decision if these turn out to be a “big surprise.”

Still, others see the BSP raising rates by 25 bp.

“[L]ikely, the BSP will hike rates this August by at least 25 bps to especially address second-round effects even as inflation remains hostage to potential rice and oil supply shocks for now,” said Ildemarc C. Bautista, vice-president and head of research at the Metropolitan Bank & Trust Co.

Benchmark rates are currently at 3-4%. The BSP last raised rates by 50bp in one go in July 2008, which saw inflation surge to a 17-year high at 12.2% against a 3-5% target that year.